A Candid Letter From Oakmark Select
Kurt Brouwer August 28th, 2007
We like Oakmark Select Fund and have a lot of respect for its portfolio manager, Bill Nygren. As a shareholder in a given stock mutual fund, we always want it to do well. Obviously, no fund will do well all the time, but that’s the plan.
When we do own a fund that is not doing well, this is the kind of candid–at times brutally so–letter we hope to receive from the portfolio manager. Well actually, we hope the manager never has occasion to write such a letter, but if things aren’t going well, we appreciate the honest commentary. The full letter is here [emphasis added].
‘The Oakmark Select Fund’s performance since the end of the second quarter has been dreadful. Not only has the market declined significantly, but our Fund has fared meaningfully worse. What is especially frustrating is that this decline has not been caused by an unusual number of reductions in the earnings or growth prospects of the businesses we own. One of the primary negatives has been fear in the home mortgage market. This has caused sharp declines in the stocks of mortgage originators, and our largest holding, Washington Mutual, has been hit hard, though not as hard as many in that business…’
Dreadful is a strong word and it is clear from the opening that there will be no equivocating for Bill Nygren. I also suspect that Nygren is rethinking his very large position in Washington Mutual. Though he really like the stock, bad things can and do happen to good companies.
In any case, this letter stands in sharp contrast to letters we have seen from quantitative hedge fund managers (see here for a funny series of such letters collected by Barry Rittholtz). Nygren continues:
‘…we are also aware of how difficult this is for our investors, which is why I wanted to share this message reinforcing our approach to investing.
Oakmark’s investment philosophy is centered on the belief that in the long run, business performance and stock price performance converge. In the short run, however, stock price performance is controlled by supply and demand, which is strongly influenced by investor emotion. Those short-term disconnects create opportunity that we attempt to capitalize on. We buy businesses we believe are growing and well-managed, and we do so when we believe the company’s stock price does not reflect its real value. Then we wait. Over time, when price and value become consistent, we sell our stock and look for a new opportunity. The waiting part can be frustrating, especially at a time when our stock prices are moving in the wrong direction. But there are only two ways we can fail — we can fail if our analysis is wrong, and we can fail if we run out of patience…’
In my opinion, Oakmark Select has a solid investment strategy and strong discipline and Nygren makes it clear that he is not going to start chasing hot stocks now even though his holdings are out of favor. He also points out that his personal investments are in the Fund and so he has sufferered along with his shareholders.
‘…Finally, I can assure you that we at Oakmark remain economically aligned with you, our shareholders. Personally, I don’t own stocks except through our funds. My largest investment is in The Oakmark Select Fund, and I have purchased more shares this quarter. The last few weeks have been as frustrating as any period I’ve experienced in my career. That frustration, however, will not cause us to abandon the discipline that has served us so well for so many years. We appreciate your patience and the confidence you have shown in our investment philosophy. Prices and values will eventually converge, and we believe that convergence will be positive for our results…’
It has been our experience that even solid, fundamentally-sound funds such as Oakmark Select periodically do go through tough times. However, it has also been our experience that the fund that has been the dog of the portfolio will often turn out to be the portfolio’s darling in the not too distant future.
Update: Oakmark recently published another letter on the fund and the difficult year it is having. Here is the link, Oakmarket Select 12/18/07 Letter. Unfortunately, there has been no good news to report as the fund’s holdings are still struggling. Portfolio manager, Bill Nygren, is again quite candid and we have to applaud him for addressing the issue.
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